Hello, everyone. Welcome to the Agilon Health Third Quarter 2023 Earnings Conference Call. My name is Carla, and I will be your operator for today's call. Today's call will include a Q&A session. I would now hand you over to your host, Matthew Gillmor, Vice President of Investor Relations. Matthew, please go ahead.

Thanks, operator. Good afternoon and welcome to the call. With me is our CEO, Steve Sell; and our CFO, Tim Bensley. Before we begin, we'd like to remind you that our remarks and responses to questions may include forward-looking statements. Actual results may differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with our business. These risks and uncertainties are discussed in our SEC filings. Please note that we assume no obligation to update any forward-looking statements. Additionally, certain financial measures we will discuss on this call are non-GAAP measures. We believe that providing these measures helps investors gain a better and more complete understanding of our financial results and is consistent with how management views our financial results. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure is available in the earnings press release and Form 8-K. Following prepared remarks from Steve and Tim, we will conduct a Q&A session. During the Q&A session, we'd ask everyone to please limit themselves to one question so we can get through as many questions as possible. With that, I'll turn things over to Steve.

Thanks, Matt. Good evening and thank you for joining us. Momentum across our business remains strong, and we are making rapid progress against our vision to transform healthcare in 100-plus communities by empowering primary care doctors. As an indicator of our success, this year we are on track to reinvest more than $250 million into local primary care based on the high-quality, cost-effective care being delivered by our partners. These results are enabling our partner groups to expand access to preventative services, improve quality outcomes, and drive value for the communities they serve. I want to thank my Agilon colleagues and our partners for their trust in each other and their belief and support in a network that is shaping a better healthcare system for our country. Before discussing our performance for the quarter, I wanted to take a few moments to highlight our decision to sell our Hawaii business. As we have discussed with you, Hawaii operates very differently compared to our core partner markets in the continental U.S. In our core partner markets, we leverage a common operating structure. This operating structure is centered around a long-term joint venture with a skilled physician group and non-delegated multi-payer relationships with health plans and CMS. The key differences in Hawaii's operations, namely the lack of a joint venture partnership with a large physician group, a much smaller senior patient-physician panel size, and Hawaii's delegated MSO infrastructure made our Hawaii business increasingly less strategic to Agilon and created a drag on our financial results. We are pleased to transition MDX Hawaii to a new owner that is better positioned to invest into the business and optimize its delegated infrastructure, which should benefit patients and the community at large. The sale of Hawaii will enhance our ability to focus even more specifically on our partner markets at a point in time when we are driving increasing success across PCP's entire senior panel. This quarter and going forward, you will hear us consistently highlight the power and importance of our integrated senior business across Medicare Advantage and the traditional Medicare populations. Our ability to generate successful outcomes for patients, PCPs, and the system in a multi-payer full risk model is increasingly unique. Our focus on this opportunity will pay dividends in the years to come. Turning now to the quarter. Partner market performance was again extremely strong across both MA and ACO REACH. All of our key financial metrics were generally in line or above our guidance ranges, especially on an underlying basis. Our results continue to demonstrate the unique power of our model to inflect profitability while driving significant growth. During the quarter, our total membership on the platform increased 43% to 508,000 members, and revenues increased 75% to $1.2 billion. This was above our guidance and was supported by the successful onboarding of new PCPs and faster pull-through of members, particularly in new markets. Adjusted for the sale of MDX Hawaii, our partner market growth was even stronger, with total membership up 49% and revenue up 85%. Even with our faster membership growth, adjusted EBITDA continues to inflect higher, increasing more than $20 million year-over-year to a loss of $6 million for the quarter. This was in line with our outlook and supported by strong medical margin gains in our partner markets across MA and REACH. Adjusted for Hawaii, our partner market EBITDA was positive $6 million for the quarter, well above our outlook and it was even stronger on an underlying basis as our results included some net negative development from 2022. Our combined medical margin across MA partner markets and REACH was strong in the quarter, with MA generating $111 million and REACH generating $55 million. These results demonstrate the power of a PCP focusing on the most complex patients across their entire senior panel with differentiated information and care team resources. As an example, our year two-plus partner markets in MA and REACH both generated over $130 per member per month in medical margins year-to-date. Think about the value delivery to our PCP partners and the health system when we generate this magnitude of savings across an average panel size of 400 to 500 senior patients. From a guidance perspective, we have raised our membership revenue and adjusted EBITDA outlook for 2023. This was supported by the growth and margin progression in our MA partner markets, including REACH, and the sale of MDX Hawaii. We also plan to maintain a more conservative reserving approach as we exit 2023, and this is intentionally reflected in our medical margin outlook for MA and will support our future performance in 2024. Our ability to execute against our adjusted EBITDA targets during 2023 and enhance our visibility to 2024 continues to reflect the strength and durability of our model. As I have discussed with you previously, the key differences in our model are driving differentiated clinical and financial performance. Unlike the traditional fee-for-service system, which predominates across healthcare, all patients in our model have a fully aligned or attributed relationship with their primary care doctor. And through Agilon's platform, our PCP partners have the data and resources to proactively impact patient care. This translates into specific differences in the way healthcare is utilized and managed. And this shows up in our business in very tangible ways. For example, we continue to have outstanding results in the standardized star ratings measures. For 2024 stars, the percentage of our membership in four-plus star plans will increase modestly to approximately 84%. However, as most of you know, plan level star ratings also include the performance of non-Agilon providers. For our year two-plus partners, Agilon's specific performance is 4.3 stars and increased nicely year-over-year. This was despite more stringent cut points and relatively flat star ratings industry-wide. We continue to excel in areas like preventative cancer screenings, diabetes control, and medication adherence. Our quality results will drive meaningful value to our patients and the healthcare system in the years ahead. And because of our high member retention, Agilon and our physician partners will share in this value over the long term. Additionally, our ability to drive differentiated cost performance was clearly evident in the recently released ACO REACH results for 2022. This data allows Agilon to compare our performance against the unmatched fee-for-service system, as well as other value-based care models. During 2022, our REACH ACOs drove nearly 10% savings relative to the Medicare benchmark. This was more than 2.5 times better than the program average, and our results included more than 90,000 beneficiaries in diverse markets. Agilon also returned nearly $30 million in guaranteed savings to the Medicare trust fund last year. As you can see from our REACH results this quarter, our differentiated cost performance has carried into 2023. Looking forward, we believe our leadership position as the platform and network moving physicians to full risk has grown considerably. This is a function of the magnitude of savings we are generating across the entire senior panel of a primary care doctor. Our timing is also important as primary care physicians and the broader system increasingly need a scalable solution for multi-payer full risk. This dynamic is driving the ongoing inflection we are seeing from a demand perspective among both physician groups and health systems. For the class of 2024 new partners, we now expect 25,000 new ACO REACH members, and we are increasing our expectation from 100,000 to 110,000 new MA members. At this point in the year, we are nearly complete with our payer contracting cycle, which gives us better visibility into the membership pull-through. We also now have a clear line of sight to a very strong class of 2025 with multiple new partners signed, including independent groups and health systems. Implementation for this class has already begun, which should bode well for future performance. Before turning the call over to Tim, I wanted to offer a few comments on 2024. We remain highly confident in the trajectory of our adjusted EBITDA inflection and expect to share an initial view in early January. As we have discussed previously, we operate in a very forward-looking model, and our visibility into the key drivers for next year's performance is quite high. First, we have a large and growing class of 2024 new partners with an attractive margin profile that should be meaningfully accretive to adjusted EBITDA. This is a function of a longer implementation cycle for this class and targeted investments we have made around technology and centralizing key processes. Next, the combined strength of our 2023 run rate margins across our integrated senior business will have key positive implications for 2024. First, our REACH performance will carry forward, driven by our ability to maintain the cost differential compared to the benchmark. And second, the reserve actions we have taken in Medicare Advantage should reduce the risk of negative claims development next year. Finally, we remain very confident in our ability to manage the new risk adjustment model starting in 2024. The impact adds on from the V28 model change is relatively modest and given the limited maturity of our partner markets and senior membership, our ability to mitigate this impact is very high. With that, let me turn things over to Tim.

Thanks, Steve, and good evening, everyone. I'll now review highlights from our third quarter results and our updated outlook for 2023. Starting with our membership for the third quarter, total members live on the Agilon platform increased to approximately 508,000, including both Medicare Advantage and ACO REACH. Our consolidated Medicare Advantage membership increased 58% to 420,000, driven by the addition of new partner geographies and 9% growth with our same geographies. Adjusted for Hawaii, MA membership in our core partner markets grew 69% to 384,000 and our same geography growth was 12%. Reported revenues increased 75% on a year-over-year basis to $1.2 billion during the third quarter. Year-to-date, revenues increased 73% to $3.5 billion. Revenue growth was primarily driven by membership gains in new and existing geographies. On a per member per month basis, or PMPM, third quarter revenue increased 11%. This was primarily driven by benchmark updates and membership mix, including higher benchmarks in several new markets. Adjusted for Hawaii, revenues increased 85% to $1.1 billion and revenue PMPM increased 10% during the third quarter. For our MA business, medical margin on a reported basis increased 42% year-over-year to $108 million during the third quarter. Year-to-date, medical margin increased 67% to $408 million. While this was below our outlook for the quarter, the difference was primarily driven by performance in Hawaii. Adjusted for Hawaii, medical margins increased 46% year-over-year to $111 million for the third quarter and was in line with our expectation even with approximately $6 million of net negative development. On a per member per month basis, medical margins across our core partner markets increased by 4% year-to-date to $119, driven by the maturation of markets and member cohorts. For our year two-plus partner markets, medical margin PMPM increased 17% to $134 on a year-to-date basis. MA medical margins for the quarter included a net $8 million in negative development, including $9 million in prior year claims offset by $1 million in prior year revenue. $2 million of the net development was attributed to Hawaii, and the remaining $6 million was attributed to our core partner markets. The negative claims development this quarter was almost entirely isolated to system issues with a single payer related to supplemental benefit costs. As we discussed last quarter, we are making focused investments to improve our visibility into data gaps with payers. Excluding the year-to-date development, MA medical margins would have been approximately $125 PMPM in our partner markets and $143 PMPM in our year two-plus partner markets. We think this is an important metric as it better reflects the year-to-date run rate performance of our MA business in light of the sale of MDX Hawaii and the actions we have taken to minimize the risk of negative development in 2024. For our ACO REACH business, we continue to be very encouraged with the performance, which again outperformed our guidance this quarter. REACH generated $55 million of medical margin in the quarter and $117 million year-to-date, which is a two-fold increase from last year. Additionally, on a per member per month basis, REACH profitability this year is roughly comparable to the year two-plus MA partner markets. This level of performance is encouraging and underscores the power of our multi-payer full-risk platform. While REACH is not consolidated in our financial results, we do think it is relevant to think about our medical margin performance on a combined basis across our MA partner markets and REACH. This is because our combined MA and REACH performance is what drives our key profitability metric adjusted EBITDA. For 2023, our combined medical margins for MA partners and REACH are consistent with our original guidance expectations. As Steve mentioned, this sets a strong foundation for performance in 2024. Our adjusted EBITDA on a reported basis was negative $6 million in the quarter compared to negative $26 million last year. On a year-to-date basis, adjusted EBITDA was positive $28 million compared to negative $20 million last year. As a reminder, adjusted EBITDA includes geography entry costs primarily associated with new partners that will generate revenue in 2024. The year-over-year gain in adjusted EBITDA reflects the increase to our medical margins across both MA and REACH as well as platform support leverage, partially offset by performance in Hawaii and the net negative development. Excluding Hawaii, our adjusted EBITDA would have been positive $6 million for the quarter and $42 million on a year-to-date basis. From a utilization standpoint, composite utilization across MA and REACH was generally in line with expectations. For MA, we did observe an increase in utilization during May and early June, which resulted in some in-period development that we recognized during the third quarter. This was contemplated in our guidance, and trends moderated back towards normalized levels during the third quarter. For REACH, utilization during the first half of 2023 developed favorably relative to our expectation. As a reminder, our results in REACH better reflect our real-time performance against the unmanaged fee-for-service system because of how the benchmark mechanics work. Turning now to our outlook for the full year 2023. Please note that our updated guidance excludes MDX Hawaii for the full year. We have raised and narrowed our adjusted EBITDA outlook to a range of $6 million to $18 million from a prior range of $0 million to $23 million. We have also updated our membership and revenue outlook, which are both higher on an underlying basis, excluding MDX Hawaii. From a medical margin perspective, our revised outlook is $455 million to $470 million and is approximately $50 million lower than our prior range. This reflects two factors. First, the removal of Hawaii represents about $20 million of this change. Second, one of our primary goals is to exit 2023 with an appropriately conservative reserving posture in MA. In light of this, we continue to proactively refine our model to account for utilization trends as well as any potential blind spots with health plans. We have assumed utilization will not moderate any further from recent levels, which accounts for $30 million of the change to our MA medical margins. We think this is a prudent approach and is informed by our decision to maintain a more conservative reserving posture. We are pleased to make these decisions which provide a strong foundation for future performance while still modestly raising our adjusted EBITDA guidance. Full details on our fourth quarter and full-year guidance can be found in the earnings press release. With that, let me turn the call back to Steve for some brief closing comments.

Yes. Thanks, Tim. Before opening up the lines, I want to emphasize three key points. First, the sale of our Hawaii business enhances our ability to focus even more specifically on our differentiated core partner business and positions us for continued success in '24 and beyond. Second, our leadership position as the platform and network moving physicians to full risk has grown considerably, and you can see it in the clinical and financial results we are driving and in the accelerating demand from physicians in independent groups and health systems. And third, with access to better data, resources, and incentives, our primary care doctors are actively managing the way healthcare is utilized across their entire senior panel, which is yielding meaningfully better outcomes for doctors, patients, and Agilon. With that, we are now ready to take your questions.

Thank you. We will now take our first question from Lisa Gill at JPMorgan. Lisa, your line is now open. Please go ahead.

Thanks very much and congratulations on the sale of Hawaii, although I was looking forward to doing a site tour, Steve. So I guess that's off the table. Wanted to just follow up on the medical cost side. So Tim, you talked about a system issue with a single payer, data gaps with that payer. If I remember last quarter, you also talked about increasing reserves to try to account for some of this going into the back half of the year and then we saw that the prior period development here in this quarter. Can you just talk about where you are on that data gap, the systems issue? Do you feel like that's one fully behind you? And then secondly, when talking about utilization, you said in line, you saw a little bit of a bump in May and June. What we saw with some of the Medicare Advantage players in the most recent quarter is that in the quarter, they actually saw higher costs than we're projecting even beyond May and June. And one of the largest players talked about some COVID hospitalizations that they saw towards the end of the September quarter. So just want to really understand what you saw, what your expectations were and if you have anything on the COVID side or if you've seen anything on the COVID side?

Lisa, I'll start and Tim can chime in. I'll start with we raised the EBITDA guide on the year because of the strong overall performance across MA and REACH across nearly 500,000 senior patients, and that really sets a strong foundation for '24. From a utilization perspective, composite utilization was in line with our overall expectations. As Tim kind of outlined, we did see a step-up in Q2 utilization in MA and REACH. The MA was within our guide, REACH actually developed favorably relative to sort of what our expectation was around that intra-period. In Q3, we've seen a deceleration. And our guide makes an assumption on utilization that will be flat through the end of the year, and that's reflected in the reserve posture that Tim talked about in terms of an extra $3 million. But Tim, you want to talk about?

Yes, Lisa, regarding your question, we've made significant progress this year in collaborating with payers to address some of the existing gaps. Some of the information challenges stem from the complexity of our model, which includes over 30 payers and more than 100 payer contract combinations in our markets. That said, we have made good strides. This quarter's issue was specific to just one payer, and we believe we have identified and resolved the gap, which should allow us to move forward without issues. Regarding utilization trends, last quarter, we noted that we hadn't seen a significant increase yet and didn't have sufficient data from May or June to fully understand what some payers were indicating. We took care to anticipate the possibility of higher utilization in our guidance going forward. As we reported, we did experience a rise in utilization in May, but it noticeably moderated in June and has continued to trend down in early Q3. Given the comments from some major payers, I'm not entirely surprised by these fluctuations, as our model has been indicated to perform better than average. The recent spike followed by moderation likely reflects the robustness of our model. On the topic of COVID, last year marked a significant post-COVID phase, and we observed a seasonal increase in COVID-related utilization around August and September. This year, while we did see some seasonal effects again, the spike was lower than what we experienced last year. Overall, COVID hospitalization rates have not materially impacted our medical margins or outlook.

Great. Thank you.

Thanks, Lisa.

Thank you, Lisa. We will now take our next question from Justin Lake from Wolfe Research. Justin, your line is now open. Please go ahead.

Thanks. I appreciate the time. I wanted to start off with a couple of questions, but I want to begin with the REACH performance. You mentioned it was $55 million of medical margin, which is about half of your medical margin for the quarter. What were your expectations in the original guidance?

Yes. Justin, just quickly, while we could elaborate a lot on the performance of REACH, which continues to be very positive this quarter, it's important to note that the $55 million in medical margin we discussed for REACH is not included in our consolidated results. Therefore, the $108 million in medical margin we reported does include Hawaii. Additionally, if you check the footnote regarding the unconsolidated ACO REACH entities, we reported $55 million there along with about $18 million of EBITDA.

Yes. If I can just add to that, Justin. I think we're driving really strong medical margin performance across the entire physician panel across both REACH and MA. And so the $55 million that Tim talked about is driven by beating that national benchmark by more than 300 basis points. In my remarks, I talked about the '22 results. You're seeing that in '23. But the same things that are driving success in REACH are driving success in MA, and our partner market medical margins came in at $111 million in MA, which is sort of in our guide. And when you adjust for that PPD, it's actually at the high end of our guide. And I think it's just a function of this model that we've got around high touch and our ability to drive better access cost and quality outcomes. So that's what I'd highlight.

Yes, the ACO REACH population has historically been unmanaged, presenting us with a significant opportunity. As we continue through this year, we have been conservative, but we have received encouraging data from CMS regarding our members and saw positive progress heading into Q3. We had initially projected around $12 million in EBITDA for ACO REACH, but we actually achieved an $18 million improvement overall thus far this year. Success in ACO REACH comes from outperforming the Medicare fee-for-service model on cost performance, and we are exceeding that benchmark by over 300 basis points year-to-date. This model is proving to be very valuable for ACO REACH.

And then, Justin, what was your real question? Sorry.

Well, I wanted to ask about ACO REACH. My memory of the Investor Day suggests that you adjusted your expectations for ACO REACH downwards. If I remember correctly, you were anticipating $35 million in profitability by 2026.

That's right.

Okay. So it sounded like you had kind of gotten more conservative or is the thought process there like, hey, let's take that number down a bit. So six months later, you're running at that run rate already looks like. Is that a number that you think we should be looking at differently than from the Investor Day? Are you thinking about that business differently?

Yes, absolutely. Our emphasizing the power across the entire senior panel is hopefully one of the big takeaways that you're going to have. The way the mechanics and the ACO REACH model work is you carry forward your performance, and you need to beat that underlying benchmark, which we would expect we're going to do again next year. And so I think we feel like we're going to have much stronger performance going forward. We've already seen it this year-to-date. And we have much more valuable and readily available and consistent information, which is giving us high confidence in that.

Got it. All right. I'll jump back in the queue. Thanks, guys.

Justin, thanks.

Thank you, Justin. We will now take our next question from Stephen Baxter from Wells Fargo. Stephen, your line is now open. Please go ahead.

Thank you for the clarification regarding the revisions to the medical margin guidance. I understand that you are indicating that $20 million of the revised lower range of $50 million to $55 million in medical margins stems from excluding Hawaii. This suggests that the remaining $30 million is attributed to the ongoing partner markets. I would like to comprehend the $30 million in light of the recent quarter. It seems that when removing Hawaii's results, the medical margin guidance for the third quarter appears to be largely consistent. Could you help me understand why there is a $30 million decrease in the medical margin on a core basis if the quarter was relatively aligned with expectations? It seems this is mainly affecting the fourth quarter. I hope that makes sense. Thank you.

Sure, Stephen. Thanks for the question. I think a key goal for us was to raise and be adjusted EBITDA in the year. We were able to do that based on the strong performance across REACH and across MA. To your point, in those partner markets, they were very strong. The second goal was to really put ourselves in a position from a reserving standpoint in which we could significantly mitigate the chance of any negative development into 2024. And so I think that, coupled with this utilization outlook, which we think is prudent that the deceleration we're seeing in Q3 will not necessarily continue. That's what puts that $30 million on top of the $20 million that you take out for Hawaii. So that's really the logic around it.

Yes, I believe that's correct. As we wrap up the third quarter, if we set aside the prior period development and consider Hawaii, which underperformed our expectations for the quarter, our overall medical margin per member per month was within the range we anticipated. We were pleased with that outcome. This was driven by higher revenue as we finalized our mid-year adjustments and updated our revenue estimates for the year, alongside some increased medical expenses due to the spike we experienced in May and early June. Looking ahead, we assumed no significant moderation and aimed to minimize any prior period development impacting 2024, resulting in an additional $30 million in medical expenses compared to our earlier guidance. We managed to achieve this while also benefiting from the strength of the ACO REACH business and other identified actions. Consequently, we are in a position to slightly raise our overall adjusted EBITDA guidance for the year.

Thanks, Stephen. I think we're ready for the next question.

Thank you, Stephen. We will now take our next question from Gary Taylor from Cowen. Gary, your line is now open. Please go ahead.

Thanks. I have a couple of questions. First, regarding Hawaii, could you explain why it had an $11 million impact on EBITDA in the third quarter, compared to only a $2.5 million impact in the first half? It seems that all the metrics for Hawaii worsened significantly in the third quarter.

Yes. Generally speaking, as we progress through the year, our medical margin tends to decline seasonally. In Hawaii, this contributes to significant deleverage due to the delegated model and our higher cost basis there. Consequently, in the third quarter, without any improvement in the medical margin, we would experience an increasing negative impact on EBITDA as time goes on. Your calculation is accurate; the overall reduction from Hawaii in the quarter was around $12 million on the EBITDA line.

Got it. So just normal seasonality. The second one was, I guess, I'm probably not the only one struggling a little bit with the negative prior year development that keeps showing up, but the idea also that you've been building reserves. But overall, how do we think about carrying this? At the end of the day, the prior year development indicates that last year's cohort medical margin wasn't as good as you originally thought. The increase in reserves suggests that this year's medical margin won't be as high. How do we think about carrying that over the next couple of years? How does this development reserve building impact your modeling of the cohort medical margin development?

I can start, Tim, and you can jump in. Gary, I think the thought process is we've been building this year to remove the issue for next year. And so this year, we have the impact of the negative PPD in our results. We also have the impact of the build, which is there to try and put us in a position where we don't have it going forward for next year. So I think you step off with a very strong run rate across REACH and MA. I think we have a plan to not have PPD recurring, which we've had in the last couple of years. So that should really help as we do that. And then we have a really strong class coming in for '24 that we just told you is larger than we had previously told you. And the performance of that class we expect to be at the very high end of our typical margin range. And so all of those things I think as you look towards '24 are real positives for us. And that's been our goal. Our goal has been to deliver on the EBITDA for this year and to try and take this issue around negative PPD off the table. And we've had the ability to do that because of the strong performance.

Thank you, Gary. We will now take our next question from Jailendra Singh from Truist Securities. Jailendra, your line is now open. Please go ahead.

Thank you for taking my questions. I have a quick clarification: who was the buyer for the Hawaii asset? Was it a related party? My main question is about utilization trends. One of your peer partners, Humana, recently mentioned having a higher medical loss ratio from their PPO business, which I believe is over half of your membership. What trends are you seeing in utilization among PPO members compared to HMO members? Additionally, some payers have discussed offering Flex cards and OTC benefits, viewing this as an advantage for next year. How have your discussions been regarding reimbursement for this pressure that you are effectively taking on for them?

So that's three questions in one. I'll start with the buyer, who is an experienced organization based in California with strong capabilities in delegated model services, particularly in claims and customer service. We believe they are an excellent fit for MDX Hawaii. Regarding our PPO experience, we have previously mentioned that we are likely the largest risk-based player in the country concerning PPOs. Our PPO business comprises just over 50% of our membership and is also our fastest-growing segment. The performance of our PPO business aligns well with that of our HMO business. This is attributed to the differences in our model: a large payer with a broad network compared to our high-touch primary care physician patient model, which effectively guides patients to specialty care. We shared at our Investor Day that over 90% of specialty referrals come through the primary care physician, even within a PPO model, enabling us to provide cost-effective care. Our PPO experience is solid. Regarding the Flex card aspect, our conversations indicate that, on an aggregate level, we are likely seeing a year-over-year reduction in the total dollars spent across our population regarding those cards.

Thank you.

Thank you, Jailendra. Our next question comes from George Hill from Deutsche Bank. George, your line is now open. Please go ahead.

Good evening, everyone. Thank you for the question. Mine is quite similar to Jailendra's. As we move into the latter half of the year, we anticipated that many Medicare Advantage MCOs would reduce benefits due to the unfavorable rate environment for 2024 and the adjustments in the risk model. However, it appears that most have maintained their benefits despite these challenges. Could you explain, at a high level, how you perceive the maintenance of benefits in conjunction with a more difficult revenue landscape? Additionally, how are you approaching this in terms of medical margin and EBITDA margin?

Yes. So, George, I think our outlook on '24 is strong for the reasons I talked about, strong run rate, strong class coming in for '24, being able to manage that new risk adjustment model very well. I think our view on aggregate supplemental benefits is that there will be a net pullback on those for the markets that we're in. It's a market-by-market basis. We don't have a lot of D-SNP in our markets. And so that's kind of the view. And so that would be neutral to a net tailwind, meaning the supplemental benefit experience from '23 to '24. But the big drivers are really the step-off in the run rate, the strong class of '24 and then just our ability to drive kind of medical margin maturation year-over-year.

And George, I would like to add one point. When you consider our geographic exposures compared to some of the companies you mentioned, our geographic exposure and the patient population we serve are quite different. This is what reinforces our belief that the changes you referred to are very manageable for Agilon.

Okay. I appreciate the color. Thank you.

Thank you, George. Our next question comes from Whit Mayo from Leerink Partners. Whit, your line is now open. Please go ahead.

I have just two quick questions. Steve, you've mentioned the investments you're making and the 60 blind spots on trend. Can you provide any updates that suggest these gaps are starting to improve? Also, I want to clarify something regarding the guidance. Last quarter, you indicated a $30 million increase in the reserves for the third quarter. Are you now saying there's an additional $30 million on top of that previous $30 million? I think there's some confusion among us.

Yes, we can start with the guidance. Last time we discussed a total of 60 million for Q3, and we are now indicating an additional 30 million for Q4. This reflects the combination of those two amounts. We are able to achieve this due to the strong overall performance. Regarding our investments, we are making progress with our payer partners on data submission, and we're enhancing the speed at which we receive that information. Additionally, our REACH real-time data indicates we are tracking well and managing within the expected ranges. Inpatient numbers are down while outpatient numbers are up, and we are pleased with that trade-off. This trend holds true across both MA and REACH. The investments we've made, including bringing in a new data officer, are improving our operations. We are also building reserves to ensure we are adequately prepared if development occurs.

Yes. So when we came through the second quarter and said, hey, we're going to basically increase our outlook for reserves because we didn't feel like we had clear visibility to some of the increases in utilization that the big payers were putting out there. So now we've actually seen that. We did see that spike up in May, moderated a lot in June, came back down, continued to come down in July. So we've now accounted for that, and that was part of our increase on a rate basis, the $60 million of medical expense that we had forecast or that we had guided through coming out of the second quarter. And we've accounted for that all now in the third quarter results that we just published. As we look forward now to the fourth quarter, we've assumed that even though the spike in May clearly has moderated down some that we're not going to forecast that it's going to moderate any further. Our guidance has then anticipated it's going to moderate any further, and that would essentially represent an additional $30 million that we've put into our medical margin or medical expense forecast for the second half and is the second reason why our medical margin forecast for MA has come down. So if an additional $30 million makes this assumption that we don't see any further moderation in claims and puts us, we believe, in a strong position to minimize the possibility that they'll be negative development bleeding through into 2024. And we're able to do that at the same time maintaining and actually slightly raising the midpoint of our overall EBITDA guidance for the year.

Okay. Thanks for the clarification.

Thank you, Whit. We will now take our next question from Adam Ron from Bank of America. Adam, your line is now open. Please go ahead.

Hi. I have a quick question about cash flow. It appears that adjusted EBITDA has increased by $50 million year-to-date compared to last year, but cash flow from operations has decreased. It seems that working capital used has nearly doubled year-over-year. I'm curious about what is causing this—whether it's just a timing issue and if we should anticipate an increase in Q4. Additionally, how should we generally view the relationship between EBITDA and cash flow? Thanks.

Yes, Adam, thanks for the question. It's always a timing thing with cash flow. Our cash flow, when you think about what our final payments and our big payments come in from payers when years are settled up and our surplus has settled up, we typically do have a lag of when EBITDA is generated versus when we actually see the cash for that. So the fact that we have a large number of new payers and a large number of new markets this year, I think something like 34% of our members are actually from this year or on the MA side are actually from our new markets, that just exacerbates that delay essentially. So we always say that the EBITDA that we're generating this year, we would primarily see transitioning into improved cash flow in the next year. So a little bit in the third quarter, we also have just with the sheer number of new payers and new markets we have, a little bit of a timing issue even when we would normally get some of that settled up. And so we've got maybe a little bit less cash payments that came in, in Q3 that will come in through the rest of the year. But yes, we always do have a timing disconnect between the EBITDA we're generating and the cash that we receive for that performance.

Thank you, Adam. Our next question comes from Jamie Perse from Goldman Sachs. Jamie, your line is now open. Please go ahead.

Hi. Thanks. Good afternoon. First one, a quick clarification on the $60 million medical margin reduction year-to-date. How much of that is from changes in utilization patterns that you've seen and how much of that is from insulation from future prior period development? And then my second question, just on new membership for next year, the 25,000 from ACO REACH, 110,000 from MA. You guys have previously said a higher starting point on medical margin per member per month next year. I think you've given above 60 for that on the MA side. How should we think about that in light of what you're seeing in utilization and the new reserving policies? And a similar question on ACO REACH, just do you think the 300 basis point delta versus the benchmark can hold next year? Thank you.

I will start with the second question. We are optimistic about the class of '24 next year and expect to be above the $60 PMPM range. Our implementation process has gone extremely well, which is attributed to our investments in technology and a quicker sales cycle despite a longer implementation period. Regarding the REACH side, we anticipate that our performance will continue positively. This is always in relation to the net utilization across our entire Medicare book. Historically, we've maintained a positive margin of anywhere from 100 to over 300 basis points. Based on our earlier discussions, we expect this trend to continue moving forward.

Yes. To follow up on the REACH question, we've discussed that REACH, which is tied to our revenue benchmark, fluctuates throughout the year based on utilization. As long as we continue to exceed the Medicare fee-for-service benchmark, which we have been consistently achieving, we will maintain strong performance on REACH. This year, we are outperforming that fee-for-service population by over 300 basis points. Our model is making a significant positive impact, especially since it was largely applied to an unmanaged population before. Regarding our medical expense guidance for the fourth quarter, we have assessed the recent spike in May that decreased somewhat in June and July and do not expect it to fall further. Consequently, we are increasing our medical expense forecast by an additional $30 million for the fourth quarter, which should help us meet one of our main objectives: to ensure we are properly reserved to avoid any prior period developments affecting 2024. Instead of categorizing the expenses, we’ve analyzed the trend and aimed to be conservative enough to minimize the risk of similar issues next year.

Thank you, Jamie. We will now take our next question from Elizabeth Anderson from Evercore ISI. Elizabeth, your line is now open. Please go ahead.

Hi, everyone. I appreciate the question this evening. First, I was hoping you could provide some qualitative insights on the additional reserving measures you’ve implemented to manage utilization as we enter 2024. I recall you mentioning in your prepared remarks that you're also making qualitative changes in this area. I'm curious about your approach to claim management regarding this. Secondly, could you elaborate on the shift in geographic entry costs and how that has developed compared to your initial expectations, especially considering the large size of the class? Thank you.

So I think Elizabeth on your first one, Tim walked through the math on the reserves. I think maybe what you're speaking to is we have added an SVP of Data Solutions and we are working much more closely with payer partners to make sure that we're getting data in a consistent and more ready fashion around that. So we're making progress on that. Do you want to talk about geo entry costs?

Yes. I would like to add that I wasn't entirely clear on the first question, but if it's relevant, I want to mention that we experienced some significant prior period development with key partners this quarter. The positive aspect is that we've made substantial progress across our payer platform in enhancing the quality and timeliness of the information we receive. If there's a bright spot in this quarter, it was a specific limited issue with one payer. I believe our ongoing investments and the expertise we've brought in will yield positive results moving forward. We're feeling more optimistic about that. Regarding geographic entry costs, we performed slightly better than we anticipated this quarter. Since we are reporting our adjusted EBITDA differently this year, we are being somewhat conservative in our estimates, but overall, we expect our total geographic entry costs to remain in the $400 to $600 range per new member for the upcoming year. Therefore, we do not anticipate significant changes in this area and expect to stay within that range.

Thanks so much.

Thank you, Elizabeth. Our next question comes from Sean Dodge from RBC Capital Markets. Sean, your line is now open. Please go ahead.

Hi. Good afternoon. This is Thomas Kelliher speaking on behalf of Sean. Thank you for taking my question. I want to ask about the higher acuity clinical programs you have. You've already implemented your capabilities for the older cohorts from 2018 and 2019. I'm curious about your latest thoughts on the potential benefits from rolling out these capabilities for the cohorts that are already achieving medical margins per member per month exceeding 200. Thank you.

Yes. Thanks for the question. I think one of the distinctive parts of our model is that we've got these programs around renal, around palliative, around high-risk management that are part of the care team around that PCP. We get much better enrollment rates and much better impact. That's how we're able to drive things like negative inpatient trends. To date, we're about 60% implemented across all of our markets. Our earliest markets do have those rolled out. By the end of '24, we will have them across all markets, including the '24 markets. So I think we do believe that there's upside from these clinical programs as we get them more fully rolled out.

Okay. Thanks. I appreciate that.

Thank you, Sean. Our next question is from Jack Wallace from Guggenheim. Jack, your line is now open. Please go ahead.

Hi. Thanks for taking my question. Just wanted to follow up on the cash flow question from earlier and just given the moving pieces this year. So Hawaii larger than normal, new class for next year, the incremental reserves. You do think that it's reasonable to expect the free cash flow positive next year or is that maybe more realistic for '25 timeline?

Yes, we're still on track, and as I mentioned before, we have a very large class entering this year. That class is performing really well. I believe that 2024 will see even stronger performance, but we are pleased with the large group we brought in this year and their current performance. As the additional EBITDA we are generating this year carries over into next year, it will significantly support our ability to generate positive free cash flow this year. For now, we are still on target to achieve that. We will keep you updated as we progress through next year. At this point, we feel optimistic about next year serving as a transition year into positive free cash flow.

Excellent. That's all from me. Thank you.

Thank you, Jack. We have no time for further questions. So with that, I will hand back to Steve Sell, CEO, for final remarks.

Thank you, everyone. We appreciate your interest in our company, and we look forward to updating you on future calls. So we will talk to you soon.

This concludes today's call. Thank you all for your participation. You may now disconnect your lines.